THE TRAGEDY OF THE TELECOMMONS - GOVERNMENT PRICING OF UNBUNDLED NETWORK ELEMENTS UNDER THE TELECOMMUNICATIONS ACT OF 1996

Until last year, local telephone markets had been treated as natural m onopolies and thus subject to regulation. The Telecommunications Act o f 1996 (the ''Act'') seeks to introduce competition into these markets . One method the Act adopts to stimulate such competition is to mandat e that incumbent local exchange carriers (LECs) provide access to thei r unbundled network elements (UNEs). UNEs are the building blocks of a local telephone network, such as loops and switches. in August of 199 6, the Federal Communications Commission (FCC) issued its First Report and Order, which established a pricing rule for UNEs. The FCC's prici ng rule sets the price for a UNE at its total element long-run increme ntal cost (TELRIC) plus a reasonable share of the incumbent LEC's forw ard-looking common costs. Mr Sidak and Professor Spulber propose a pri cing methodology to implement that rule based on a combination of what they call the market-determined efficient component-pricing rule (M-E CPR) and competitively neutral end-user charges. They assert that usin g the M-ECPR to price UNE access is more faithful to the language and intent of the Act than is the approach adopted try the FCC. They also maintain that the FCC misunderstood the efficient component-pricing ru le when the agency rejected it as a basis of pricing UNEs. After outli ning their proposal for pricing UNEs, Mr. Sidak and Professor Spulber argue that the FCC's pricing rule is problematic because it prevents t he incumbent LEC from recovering its total costs by denying any recove ry of the LEC's historical costs and ensuring that it will not fully r ecover its forward-looking costs. The authors then respond to criticis ms of the M-ECPR by various economists and refute assertions that the principal authors of the original efficient component-pricing rule rej ected the M-ECPR in Savor of TELRIC pricing for UNEs. Mr. Sidak and Pr ofessor Spulber conclude by warning that the FCC's pricing rule would discourage investment in local telecommunications networks and may eve ntually drive LECs into bankruptcy.